India IPO Calls at a Tough Time
Sale of Stake in BSNL
Could Further Depress Market
By ERIC BELLMAN
August 11, 2008
MUMBAI -- The Indian government's plan to list the country's largest phone company is an important step forward for its long-stalled privatization program. But the timing of the move could be another blow to India's battered stock market.
Late last week, Telecommunications Minister A. Raja said the government was in talks with the unions of Bharat Sanchar Nigam Ltd., known as BSNL, to list the shares of the government-owned phone company. The government had talked about selling BSNL shares in January this year, but opposition from company unions and leftist political parties that were then part of India's ruling coalition derailed that effort.
The new plan would offer about 10% of BSNL's stock for sale and would likely become India's largest initial public offering ever, valued at as much as $10 billion. It would also be the first major step in four years for what India calls a "disinvestment" program, in which the government sells shares in state-owned companies.
At the right price, investors and analysts say, the government should able to sell the BSNL shares. But many suggest the time isn't right for such a monster issue.
"Don't call us, we'll call you" could be investors' response to a giant telecom IPO now, says one India-based international investor.
Indian stocks have been among the hardest hit by growing global concerns about subprime debt and an economic slowdown in the U.S. and elsewhere.
While few Indian companies have been directly affected by the financial crunch, their shares have taken a beating, thanks to nervous foreign investors taking money out of the local market. The Bombay Stock Exchange 30-share Sensitive Index, or Sensex, has plunged more than 25% this year, with foreigners being net sellers of billions of dollars in shares. Unless there is a strong return of optimism over economic prospects here and abroad, the huge new BSNL issue could depress the broader Indian market, analysts suggest.
This year's slump has already blunted the country's IPO market. At the beginning of 2008, investment banks predicted another record year for Indian IPOs. But more than 19 planned issues valued at more than $2 billion have already been postponed, says Prithvi Haldea, managing director of Prime Database, a Delhi-based primary-market-data company.
To be sure, BSNL stock could be worth owning -- if the price is right. The former national monopoly, which controls the government phone infrastructure outside of New Delhi and Mumbai, has more than 70 million subscribers, mostly for landlines. In the year ended March 31, 2007, the last year for which it has announced its earnings, BSNL recorded a profit of 78.06 billion rupees ($1.86 billion) on sales of 397.15 billion rupees.
Earlier sales of other state-owned companies, including stakes in National Thermal Power in 2004 and Power Grid Corp. of India last year, were done at prices that attracted investors.
Mr. Raja, the telecommunications minister, said he is considering a price of between 300 rupees and 400 rupees a share for BSNL. Analysts and investors say it is too early to judge whether that would be an attractive price because BSNL has yet to issue a prospectus or even hire advisers to do a due-diligence assessment.
Mr. Haldea says government companies "historically have displayed underpricing at their IPO," creating good reasons for investors to seek a piece of those offerings.
The government's decision to talk about a potential price before hiring an adviser shows how BSNL, like many state-owned companies, has to think about politics before profits. Analysts say Mr. Raja announced a possible price range because he is using the IPO price to entice the unions representing BSNL's 300,000 employees to back the issue.
The Telecom Ministry has offered to sell each employee 500 shares at just 10 rupees each, meaning they could stand to reap a huge windfall upon listing of BSNL's stock. Nonetheless, the unions so far have rejected the offer.
New Delhi is moving ahead with the IPO plan now, analysts say, because it is no longer dependent on Communist parties that left the Congress-led ruling-coalition government last month to protest India's controversial nuclear-cooperation agreement with the U.S.
The analysts say politics inside state-run companies like BSNL has slowed their decision-making process and made it difficult for them to reduce staff. Political pressures and bureaucratic barriers are one of the reasons BSNL hasn't grown as fast as private-sector telecom players such as Bharti Airtel and Reliance Communications.
Hitesh Kuvelkar, an analyst at First Global Securities in Mumbai, says BSNL "should have been the first guys to take advantage" of the boom in India's telecom industry. "But they are not the leaders today. Private companies have taken the lead."
While a listing for BSNL is coming years after private telecom operators had IPOs, it will still be an important issue. If the government can pull off a successful IPO, that could open the way for a long line of other state-run companies to go public.
It isn't just the end of New Delhi's reliance on leftist support that has made the government eager to sell stakes in state enterprises. It desperately needs the money: The federal budget deficit has been soaring as India subsidizes gasoline prices to protect consumers -- and voters -- from surging oil prices.
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